Why Helio Didn't Connect

The flashy cell-phone company is in a very tough business.

Helio, which aimed to use souped-up
mobile devices and spiffy services to build a virtual mobile phone company,
instead has been sold off for a fraction of its backers’ investment. Helio thus
becomes the latest reminder that the wireless industry remains a perilous place
for startups.

“If you look at wireless as
a whole, it’s represented a net destruction of capital for venture
capitalists,” grumbles William Frezza, a general partner at the Boston venture
capital firm Adams Capital Management.

Despite receiving some $710
million in capital, Helio was able to attract only about 170,000 customers, racking
up significant losses in the process.

The trouble
was not a lack of innovation. Helio’s
May 2006 launch saw it put two twists on the market for virtual mobile phone
companies: it offered high-end cell phones with unique services, like
integration with MySpace and YouTube, and the ability to make micropayments via
the phone. And where other virtual mobile
providers (also called mobile virtual network operators, or MVNOs) went after
underserved niches, Helio rented space on Sprint’s cellular network and then
used it to go after a mainstream cellular market: young people. Helio had big
backers in Earthlink, a successful Internet service provider, and South
Korea’s SK Telecom, and it was headed by Sky Dayton, Earthlink’s wunderkind
founder.

Helio entered a market
filled with froth: less than a year earlier, Sean “Diddy” Combs gave a keynote
to the 2005 Cellular Telephony Industry Association trade show and said, “I am
an MVNO.”

One virtual phone company
that has had success is Virgin
Mobile USA, which bought Helio for perhaps $49 million–$39 million in
stock and the assumption of as much as $10 million in debt. Helio itself is not
dead: Virgin Mobile will continue to market its service. But observers say that
the deal strikes a death blow to the idea that U.S. consumers will buy high-end
mobile phones from someone other than a cellular carrier.

“The chapter closes on this market, and it’s turning the page,” says Chetan Sharma, president of
Chetan Sharma Consulting, based in Issaquah, WA. Sharma says that Helio would
have needed a million customers to get to a break-even point.

Apple’s iPhone might seem to
fly in the face of this assertion. But the iPhone model stops short of being an
MVNO, says Lewis
Ward, an analyst at International Data Corp (IDC). While Apple has more
control over its phones than any other phone maker in the U.S. cellular market,
it shares branding with AT&T and is not renting airtime from AT&T. Ward
also says that the sale of Helio probably marks the end of efforts to create a
high-end virtual mobile phone operator in the United States.

In
2006, Helio was part of a spate of companies trying to offer high-end services
and cell phones without operating their own networks. Disney’s Disney Mobile
and Mobile ESPN were out there, as were startups like Voce and Amp’d Mobile.
All failed, for various reasons.

But there is still life in
the concept of renting cellular network capacity. Virgin Mobile and Tracfone
are the biggest of at least a dozen firms that sell prepaid phone messaging
services to niche markets. Such firms hold about 8 percent of the overall U.S.
cellular market, according to data from Chetan Sharma Consulting.

Still, it’s a very
low-margin market built on selling prepaid calls. Tracfone–with nine million
customers, it’s the biggest of these firms–pulls in only about $12 per
customer per month. Virgin Mobile has five million customers and sees revenues
of about $21 each per month. Helio, meanwhile, made about $80 in revenue per
month from its typical customer, a far more lucrative market. Still, IDC says
that MVNOs represent only 2 percent of the overall mobile phone revenues in the
United States.

At least one analyst thinks that
Helio’s fall may foreshadow problems for phones that use Google’s Android
platform, which will allow for phones that can be attached to any network. If
consumers buy phones and then shop for networks, “the wholesaler can’t make any money, and the person reselling it can’t
make any money,”
says Andrew M. Seybold, a
veteran wireless analyst in Santa Barbara, CA.

Helio has found a welcome
parent in Virgin Mobile. Buying Helio seems unquestionably a good deal for the
company. It gets the Helio brand, its services, its infrastructure–which
Virgin Mobile will adopt as its own–and its customer base, plus approximately
85,000 handsets (Virgin Mobile will eliminate Helio’s retail stores and
kiosks). It also gets $50 million in cash from Virgin Group and SK Telecom, and
an extra $60 million for its credit line. What’s more, Sprint lowered Virgin
Mobile’s pricing.

“It’s a terrific deal for
us,” says Jayne Wallace, a Virgin Mobile spokeswoman. It will treat Helio as
its entry into the traditional cell-phone market and operate it to compete with
the high-end offerings of traditional cellular carriers. Virgin Mobile’s ultimate
hope: that the 20 percent of its customers who leave for traditional cell-phone
companies, in search of better phones and services, will now stick with it.